ASX has just released the final guidance note on the continuous disclosure provisions of the ASX Listing Rules. This comes after the completion of a public consultation process which followed the release of the first draft guidance note in October 2012 (see our summary of that here). It is due to come into force on 1 May 2013.
In broad terms, ASX has maintained its guidance and the changes made to the guidance note are intended to provide further information about ASX’s approach in interpreting the continuous disclosure provisions in light of feedback received from the market.
The key points to note are:
- The meaning of “immediately”. Further to ASX’s earlier guidance that “immediate” disclosure means “promptly and without delay”, ASX has explained that this means making disclosure as quickly as can be in the circumstances (ie. acting promptly) and not deferring, postponing or putting the disclosure off to a later time (ie. acting without delay). For example, if the announcement is of such importance that the entity considers it requires board approval prior to release, the board meeting must be held promptly and any delay in being able to convene such a meeting cannot be used as a justification for delaying the disclosure (rather, consideration needs to be given to applying for a trading halt).
- The use of trading halts. One of the concerns about ASX’s original guidance was the suggestion that entities ought to be using trading halts more extensively to manage their continuous disclosure obligations where circumstances prevented them from making a prompt announcement. To alleviate that concern, ASX has clarified that it would not expect an entity to request a trading halt or a voluntary suspension before it has assessed whether particular information is in fact price sensitive and therefore needs to be disclosed under Listing Rule 3.1.
However, ASX warns that a trading halt may still be necessary if there are indications that the information may have leaked and is likely to have a material effect on price or the entity has been asked by ASX to provide information to correct or prevent a false market or the information is “especially damaging and likely to cause a significant fall in the market price of the entity’s securities”. In those circumstances, a trading halt would be necessary if, either, the market was currently open or, if the circumstances arose after market close, the entity would not be in a position to release an announcement pre-open.
- Further guidance on carve outs from the disclosure requirements. One of the more significant areas of guidance concerns the carve outs from continuous disclosure contained in Listing Rule 3.1A. ASX has broadened its guidance to explain the role that this carve out plays in balancing the interests of the market in receiving materially price sensitive information at the earliest reasonable time and the interests of the entity in not having to disclose information prematurely or where it would clearly be inappropriate to do so.
ASX has maintained its proposal to re-order the limbs of the carve out test to emphasise that the two key elements of that test are, first, that the information be confidential (that is, secret) and second, that the information falls into one of the five recognised carve outs (of which the most commonly relied on is information concerning an “incomplete proposal or negotiation”).
The third limb of the test, being that a reasonable person would not expect the information to be disclosed, was de-emphasised by relocating its position within the Listing Rule. ASX now explains that this final limb is intended to have a “very narrow field of operation” and noted it would only be tripped if there was something in the surrounding circumstances that would otherwise compel disclosure of matters that satisfy the first two limbs of the test. ASX provides as examples disclosure that would be necessary to prevent earlier disclosure made by the entity from being misleading and where the entity is relying on the carve out selectively; relying on it to withhold “negative” information of a certain type but choosing not to rely on it for “positive” information of the same quality. ASX also reiterated that it doesn’t consider this limb of the test to compel disclosure by a target of a takeover approach.
- Responding to market rumours. ASX has clarified that any rumour or media or analyst report needs to be “reasonably specific and reasonably accurate” before it will prevent an entity from losing confidentiality for the purposes of assessing whether the carve out applies (however, where such a rumour has a material effect on price or trading volumes or is likely to in ASX’s opinion, ASX can nevertheless require disclosure to prevent or correct a false market). ASX also clarified that it will have regard to the degree of specificity in the media or analyst report or rumour in assessing the extent to which there has been a loss of confidentiality (ie. if the rumour does not refer to the type of transaction, ASX would not expect disclosure of that transaction by the entity). ASX stuck to its earlier guidance that an entity needs to monitor media, however, it clarified that entities need only monitor social media (including blogs, chat rooms and other pages) that typically cover the entity and only monitor news wire services if the entity has access to those. In addition, the guidance suggests that such monitoring is only required where the company is in possession of information and is relying on a carve out from continuous disclosure.
- The importance of a sound compliance system. ASX has placed greater emphasis on the importance of listed entities having in place an appropriate reporting and escalation process to ensure that information which is potentially market sensitive is promptly brought to the attention of its officers. The definition of “aware” in the Listing Rules makes it clear that the entity is deemed to have the information actually held by its officers (ie. its directors and senior management) or which they ought to have by virtue of their position. ASX warns that failure to have in place a system to ensure that material information finds its way to officers cannot be used as a ruse to avoid the application of the disclosure rules. ASIC, in its media release responding to the final Guidance Note, also picked up this point, stating that “companies that carefully consider the updated guidance and adopt appropriate processes with the benefit of that guidance can minimise the risk that ASIC will seek to take continuous disclosure enforcement action against them”. The importance of instituting systems which encourage the escalation of material, or potentially material, information to senior management and the board cannot be understated.
Focus: Earnings Guidance
ASX’s starting point is that, all other things being equal, a listed entity isn’t required to publish its earnings for a particular reporting period any earlier than their customary reporting dates.
An entity that becomes aware that its earnings for the current reporting period will differ materially (either upwards or downwards) from market expectations (an “earnings surprise”), will need to consider carefully whether it has a legal obligation to notify the market of that fact.
ASX declined to offer any rule of thumb or percentage guidelines on when a difference in earnings compared to market expectations ought to be considered to be market sensitive given the number of variables that may influence whether an earnings surprise is market sensitive.
However, for entities that have published guidance, ASX recommends adopting the guidance on materiality in Australian Accounting and International Financial Reporting Standards. That is:
- treat an expected variation in earnings compared to its published guidance equal to or greater than 10% as material and presume that its guidance needs updating; and
- treat an expected variation in earnings compared to its published guidance equal to or less than 5% as not being material and presume that its guidance therefore does not need updating.
The middle ground of 5%-10% requires judgment by the entity (though ASX suggests that larger listed entities, or those with more stable earnings, should err on the side of adopting the materiality threshold of closer to 5% and those entities which are smaller, or which have more variable earnings, adopting one closer to 10%). However, all of the above thresholds are not intended to be definitive.
For entities without published guidance, ASX expects they will monitor any forecasts made by analysts covering the entity (including any consensus estimates). Although ASX states that a listed entity does not have an obligation to correct the earnings forecast of an individual analyst or an individual consensus estimate, it still needs to give ASX an appropriate announcement immediately “if and when it becomes aware of a market sensitive earning surprise”. This puts the responsibility back onto the entity to ascertain what the market consensus appears to be and to form a view as to whether an earnings drop off or increase as against that consensus may be market sensitive. In this respect, ASX’s guidance is no different to what has prevailed previously.
For entities without published guidance or any analyst coverage, ASX suggests that the results from the prior reporting period, together with any intervening announcements, will form the basis for the market’s expectations of forthcoming financial results.
ASX’s final Guidance Note also explains that since it is the directors who are ultimately responsible for an entity’s financial statements, it will also generally be appropriate for any announcement relating to earnings guidance to be approved by the board before release.
The revised Guidance Note (and the accompanying amended Listing Rules) are due to come into force on 1 May 2013. They have already been subject to public consultation and review by ASIC although, in the interim, they are subject to ministerial review and comment.